$145 Billion

Sorry, but I am going on another tangent because I actually was a bit player in a drama that made the headlines today: Engle, the $145 billion judgment against the big 5 cigarette companies, which was overturned today by the Florida Supreme Court — essentially on procedural grounds, as discussed below. But, by the way, the Court upheld the jury’s findings that the tobacco companies behaved wrongfully and are liable to Florida smokers!!!!!

I was one of two finance experts for the plaintiff class (Florida smokers). My involvement began very late in the trial in 2000. I testified before the jury that the companies’ ability to pay punitive damages should be measured by the companies’ ability to generate cash. The $145 billion was near the upper bound on the present values of the companies’ discounted cash flow generating potential.

Rather than respond to this analysis, the tobacco companies called their CEOS, mostly marketing guys, to testify. The CEOs said that they can only pay their accounting balance sheet value. This “book” value shows no value for the companies’ brands (except for RJR) and is a tiny fraction of the market value of the companies. (The key economic resource of a tobacco company is its brands.) Not surprisingly, the jury rejected this self-interested testimony.

In this posture, the $145 billion judgment was completely reasonable. The tobacco companies gambled and lost. While this aspect of the our trial system is disconcerting, it is the law. If the tobacco companies had won, they would have laughed all the way to the bank.

Which gets us to today’s decision by the Florida Supreme Court. Down under….

The Florida Supreme Court, in Footnote 8 to today’s opinion, accepts that financial value is the legally-relevant standard for evaluating punitive damages here, but then goes on to say that the award was not supported by the “Engle Class’s expert,” presumably referring to me. They are just wrong on this for the reasons discussed above.

As to the heart of today’s opinion, procedural stuff, I want to remind the reader that I do accounting and tax. Litigation is not an area in which I have expertise. That said, I obviously have real problems with the decision.

A little background: The trial was held in three phases. First, the jury found that the tobacco companies had engaged in wrongful behavior. Second, they found millions of dollars in damages for three members of the class. Then, the jury determined the punitive damages for the entire class: $145 billion.

The Florida Supreme Court ruled today that punitive damages must be decided as to each smoker and not with regard to the class as a whole. There are hundreds of thousands of Florida smokers in the class. The jury in this case was the longest sitting jury in history — over 2 years. Requiring injured smokers to sue separately for punitive damages, including explaining the wrongs committed by the tobacco companies to hundreds of thousands of juries, could well be an insurmountable burden. The Florida Supreme Court’s tortured reasoning makes it likely that the tobacco companies will never be punished for what they did. This is wrong.

But, like I said, I am not a litigator. Decisions like this would push me over the edge…..

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12 Responses to $145 Billion

  1. GeorgeMundstock says:

    Mundstock Correction: As an expert, not a lawyer, in Engle, I never even read the tobacco companies’ briefs before the Florida Supreme Court. Just did so. Turns out that the tobacco companies relied on the other plaintiffs’ expert, not me, as to the excessiveness of the $ 145 billion, which likely is the origin of the Florida Supreme Court’s footnote 8.

  2. Jonathan says:

    How exactly can a punitive award of this size ever be appropriate? If $145 billion is “close to an upper bound on the present value of these companies cash flow” then you are awarding the whole economic value of the businesses to the plaintiffs’ lawyers (if you think the actual plaintiffs will see a significant percentage of this money, then you are a fool). In other words, the tobacco companies’ conduct is so heinous that they should get their entire business taken away.

    On the other hand, you are proposing that the tobacco companies should continue to engage in this heinous conduct in order that they can continue trading as a cash cow for the lawyers. This suggests that it isn’t actually that bad. Or, more plausibly, that plaintiffs’ lawyers in tobacco litigation are a bunch of amoral lying weasels.

    If what the tobacco companies were doing was really bad enough for a full-economic-value-of-business fine to be appropriate, then an honest court would stop them doing it.

  3. GeorgeMundstock says:

    Jonathan, under now-applicable Florida lawyer, the attorneys fees in Engle are limited to an hourly rate times a low multiplier to compensate the lawyers for risk. I agree that civil punitives are awkward here. The idea is not to take the company away, however, just the profits. That is easier said than done, as the companies probably would raise prices and pay the damges out of the pockets of addicted smokers. Judge Kay’s trial opinion captured this, but he recognized that the power of the civil courts is limited. A federal government criminal action seems to me to be the optimal remedy, but the political power of the tobacco companies being what it was and is….

  4. Jordan says:

    Jonathan,
    The purpose of punitive damages has nothing to do with lawyers. By definition, punitive damages are meant to punish. Specifically, punitive damages are awarded to punish a defendant for a particularly egregious conduct and to deter such conduct in the future. In the instant case, the question is what would be significant enough to truly get the attention of the tobbacco industry and hurt enough to indeed deter such conduct in the future. In this case, if you look at the true value of these companies, this damage award figure is absolutely reasonable. It should not be looked at in terms of how much the victims will be compensated, that is the purpose of an award of actual damages. We should also not look at this in temrs of what the lawyers will make, that is completely irrelevant and will be determined as Professor Mundstock explains. The only appropriate way to look at punitive damages is by examining the extent to which such damages will deter the defendant from engaging in such egregious conduct in the future.

  5. Jonathan says:

    That is exactly the point I’m making. If the conduct is so bad that only taking away the whole company (or at least taking away its entire economic value) is an appropriate punishment then the company should be shut down.

    Instead, we actually force them to carry on breaking the law. The only way the tobacco companies can pay an award this large is by aggressively marketing a dangerous, addicitive drug – an activity so egregiously illegal that we just “fined” someone $145 billion for it. If they responded by “getting the message” and cutting back their dodgy practices, it would reduce their expected future cash flow (which is already 100% committed to damage payments) and thus send them into Chapter 11.

    Of course, the situation gets even dafter if multiple jurisidictions all have the same idea.

  6. Jonathan says:

    That is exactly the point I’m making. If the conduct is so bad that only taking away the whole company (or at least taking away its entire economic value) is an appropriate punishment then the company should be shut down.

    Instead, we actually force them to carry on breaking the law. The only way the tobacco companies can pay an award this large is by aggressively marketing a dangerous, addicitive drug – an activity so egregiously illegal that we just “fined” someone $145 billion for it. If they responded by “getting the message” and cutting back their dodgy practices, it would reduce their expected future cash flow (which is already 100% committed to damage payments) and thus send them into Chapter 11.

    Of course, the situation gets even dafter if multiple jurisidictions all have the same idea.

  7. GeorgeMundstock says:

    Anti-smoking advocates argue that punitive damages are a good thing because they reduce youth smoking by pushing up cigarette prices.

  8. lkt says:

    But what about personal responsibility? NO ONE today has an excuse for not knowing that cigarettes are bad for one’s health. It is pathetic that people have the nerve to sue the company instead of quitting smoking. They must blame someone else for their stupidity.

  9. lkt says:

    And no one’s forcing the cigarettes into these peoples’ mouths, just like no one’s forcing mcdonald’s food down peoples’ throats.

  10. GeorgeMundstock says:

    When I was at the University of Minnesota, I went to a celebration of the orginal state-brought, Minnesota, tobacco litigation. Skip Humphrey, son of the former vice president, was the attorney general who bought the suit. He also was a key player in the Master Settlement Agreement (MSA) between the states and the tobacco companies. I asked him whether the principal impact of all his hard work was to enable the tobacco companies to raise prices and become even more profitable. Not surprisingly, I almost got stoned by the crowd. First and last time that I ever went to an anti-tobacco meeting. Humphrey, surprisingly, said that what he is most proud of is what was discovered about the behavior of the tobacco companies through his litigatation, and not the MSA. A smart and honest, if by then retired, politician. What a concept.

  11. Jordan says:

    With the recent Surgeon General’s recent report on the true nature of second hand smoke effects, I am waiting for the lawsuits against smokers for injuries sustained from that second hand smoke. True, those who start smoking today have no one to blame but themselves, but what about the average person who has to walk through a cloud of smoke to get into a building or classroom? The new report leaves little question as to the damage caused by this second-hand smoke. Now that it is so strongly stated, what excuse does one have for smoking in a public place and subjecting non-smokers to such outrageous health risks? Forget excuse, what RIGHT do they have? Who should bear the burden of compensating the victims in that situation? The smoker? The owner of the “public place” that allows smoking?

  12. albatross says:

    I guess if you accept the broad story (I do) of tobacco companies supressing evidence of the harmfulness of their product for decades, then the right outcome would be for all the existing tobacco companies to be sued out of existence, or perhaps just closed down. But that wouldn’t necessarily have anything to do with raising cigarette prices, right? I mean, a newly formed cigarette company ought to be able to operate in a completely aboveboard way, by simply marketing their addictive and harmful product without supressing any evidence. (“Buy Coffin Nails brand Cancer Sticks, and save the country the cost of supporting you in retirement.”)

    But the practical goals of these lawsuits seem to center around getting lots of money, and accomplishing a legislative goal (banning or restricting the sale of cigarettes) via lawsuit. Those are inconsistent with letting the current cigarette companies go bankrupt paying their settlements, and then letting new companies arise. And the existing companies have employees, stockholders, and lobbyists who will fight to keep that kind of apparently just outcome from happening.

    As an aside, the policy goal of making a highly-addictive product many times more expensive seems a little questionable, right off the bat. Not only will you remain addicted to these cigarettes until you keel over from some of their nasty long-term health effects, but while you live, you’ll pay an extra 5% of your income for taxes intended to punish you for being addicted to them. We’re just doing this for your own good, though. Really. It’s Because We Care.

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